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The Race for Natural Gas

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Will the Eastern Mediterranean Become a World Center for the Natural Gas?

February 28th 2018

Med Natural Gas

The deal just concluded between Nobel Energy from Texas and Israeli Delek group on the one hand, and Egyptian private company Dolphinus on the other, to provide Egypt with 64 billion cubic meters of gas for a total of $15 billion over a period of 10 years may well turn out to be the first sign that the Mediterranean is about to become a world hub of gas trade.

According to United States Geological Survey estimates, huge reserves of gas can be found in the Eastern Mediterranean Sea: some 325 trillion cubic feet or 9.2 trillion cubic meters—more than all known U.S. reserves. Regional disputes, however, are likely to hinder exploration and exploitation.

Exporting Israeli gas to Egypt is beneficial to both. Selling to neighboring countries enables Israel to make the most of short distances and lower transportation costs. Egypt needs Israeli gas to palliate insufficient production until the mammoth Zor offshore field starts supplying enough gas for home consumption and export. Production started a few weeks ago, but it won’t run at full capacity until the end of 1919, and it will take another three years for Egypt to be self-sufficient. Some of the gas from Israel will be exported to meet Cairo’s contractual obligations to British Gas and Fenosa from Spain that it has been unable to fulfill, the political and economic turmoil following the ousting of Hosni Mubarak having stopped gas development and production. British Gas and Fenosa found themselves unable to fulfill their own obligations to customers and had to pay large fines. Current Egyptian President Abdel Fatah el-Sisi—looking for energy sources for his economic projects—did away with outdated and cumbersome regulation, and liberalized gas research, allowing a number of major companies to join in the search for new gas fields. This new policy was vindicated when Italian energy giant ENI discovered the Zor field and its estimated 822 billion cubic meters’ reserves.

Egyptian officials were at pains to stress that it was a business deal between private companies, while at the same time emphasizing that it was a first step toward making Egypt a regional gas market and a major player in price-fixing for that commodity. Minister of Petroleum Tarek al-Mala nevertheless declared two conditions for the deal to go through: It has to be beneficial to the Egyptian economy, and a solution must be found to the outstanding arbitration award against Egypt for breach of contract following the cessation of Egyptian gas exports to Israel in 2012. President Sisi was more forthcoming; they had nothing to hide, he stated, adding that for the last four years, he had been dreaming of turning Egypt into a regional energy hub. These attempts to preempt accusations of normalization were not wholly successful. Questions were asked in parliament; an attorney petitioned the Supreme Court to void the deal.

The ink hadn’t dried yet on the deal when Cyprus revealed that it, too, was engaged in negotiations with Cairo regarding the export of gas from its Aphrodite offshore field not far from the coast of Egypt. This would be yet another step toward furthering Sisi’s dream. Aphrodite’s reserves are estimated at some 129 billion cubic meters. Nobel energy, Delek drilling and Avner oil exploration hold significant shares in that field.

Several routes exist for optimizing the production of Eastern Mediterranean gas fields. One is to build additional facilities for exporting liquified gas. Israeli groups had suggested building several such plants in Cyprus, supplying them with Israeli gas through a pipeline and shipping it to the rest of the world in liquefied form, together with gas from Cyprus offshore fields. This solution has been discarded in favor of a more ambitious plan better suited to the interests of all parties—exporting natural gas from Israel and Cyprus to Italy through a pipeline to supply the growing needs of Western Europe, helping it to diversify its sources and reducing its dependence on Russian gas. A memorandum was signed in December by Israel, Cyprus, Greece and Italy regarding the construction of a 2,100-kilometers-long pipeline to be laid at the bottom of the sea at a cost of between $6 billion and $7 billion. Feasibilities studies are ongoing, and a final decision has yet to be reached. Egypt would likely be interested in being associated with such a project, which would provide a secure and long-term outlet for its own gas and help stabilize its economy.

Yet significant obstacles lie ahead.

Ongoing disputes concern the maritime borders of all parties involved. Cyprus has reached an agreement with Egypt regarding the delimitation of its maritime borders in 2003, in 2007 with Lebanon and in 2013 with Israel. These documents were registered with the United Nations, and are perfectly legal and binding. However, Turkey, which conquered and occupied Northern Cyprus in 1974, expressed some reservations and threatened to prevent drilling for gas unless that zone took part in the process—from research to production and revenues. It did not stop with those threats, and on Feb. 7, sent a warship to stop a drillship commissioned by ENI to protect what the Turks say are the rights of Turkish Cypriots. Undeterred, ENI tried again, but on Feb. 23, no less than five warships intercepted the drillship and made it turn back to Limassol. Efforts by the European Union to mediate the conflict have been unsuccessful so far.

Lebanon is also unhappy with the agreement between Cyprus and Israel; it has refused attempts to delimitate its own maritime borders with Israel, which then had no choice and did so unilaterally, according to internationally accepted criteria. Israel then drilled for gas and started exploitation in areas that are in its economic waters. Nevertheless, Lebanon—probably egged on by Hezbollah, which is keen to exacerbate tensions with Israel—is laying claims to a 900-square-kilometer zone that includes the Tamar gas field.

Egypt has never delimited its maritime borders with Israel. It’s currently not happy with the agreement between Cyprus and Israel, even though its commercial waters are not affected and the coordinates of that agreement conform with internationally accepted criteria here, too.

Yet another unsolved issue is the delimitation of maritime borders between Israel and the Palestinian Authority.

That said, the enormous gas resources in the Eastern Mediterranean could significantly contribute to the economic development and stability of the countries of the region, provided these governments can set aside their conflicts and differences of opinion to work together for their mutual benefit. As things stand, political and religious interests have the upper hand, and it’s hard to see how they could be overcome or avoided. Each country will therefore have to make its own way and find a solution best fitted to its interests, as exemplified by the deal reached between Israel and Egypt. It’s expected that this deal would not hinder future cooperation with other countries should it become possible.


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